Saturday, September 24, 2011

Largest U.S. wireless carrier Verizon sides with Samsung against Apple, asks court to deny preliminary injunction

Verizon, the largest U.S. wireless carrier, implores the United States District Court for the Northern District of California to deny Apple's request for a US-wide preliminary injunction against four Samsung products (the Infuse 4G, Galaxy S 4G and Droid Charge smartphones, and the Galaxy Tab 10.1 tablet computer), arguing that such a decision would run counter to the public interest as it "would hinder Verizon Wireless in developing and deploying its next generation high-speed LTE [fourth-generation] network, the job growth dependant [sic] on that network, and will undercut key public policy goals, including expansion of American's [sic] access to broadband networks and faster communication with emergency personnel."

This attempt by Verizon to interfere with Apple's enforcement of intellectual property rights against Android in general and Samsung in particular is a declaration of war that may have far-reaching consequences in the U.S. market. I'm sure that Apple will view this move as a self-serving attempt to game the system in Android's and Samsung's favor, as another sign of Verizon being staunchly Android-aligned in exchange for market-distorting favors from Google, and as an attack on the intellectual property-centric business model of Apple and other innovators.

Verizon, which recently proposed that President Barack Obama should exercise his presidential veto right against possible ITC import bans against Apple's as well as Android-based devices, filed a motion for leave (a request for permission) to file an amicus curiae brief in support of Samsung ahead of a court hearing scheduled for October 13, after which there might be a preliminary injunction against four relatively new Android-based Samsung products. An amicus curiae brief is a way for third parties with an interest in the outcome of a lawsuit to present their views to the court. The judge will now have to decide whether Verizon is admitted as an amicus curiae, which literally means "friend of the court". Verizon has already filed its proposed brief, and most likely the judge won't deny the carrier's request to intervene. However, it remains to be seen whether the judge will believe that the market-leading carrier represents the public interest, given that Verizon's objective of commodotizing smartphone technologies is transparent and that the same California-based federal court has in its records for another case, Oracle v. Google, a document that shows Verizon and Google promised each other unspecified favors, potentially anti-competitive ones since they did not document them in writing.

Verizon's brief formally -- but really just formally -- relates to only one of four intellectual property rights asserted by Apple in its motion for a preliminary injunction. Apple asserts three design patents as well as a software patent. Verizon's brief is officially limited to that software patent, which I previously explained on this blog (with videos to show what it covers) as "Apple's favorite make-Android-akward patent". Apple is also using that one in its recently-filed second ITC complaint against HTC. Officially, "Verizon Wireless takes no position on whether a preliminary injunction should be granted if the Court finds a likelihood of success on the infringement of Apple's design patents", but that's just because Verizon may want to appear neutral with respect to the design part of the dispute and avoid the impresion of supporting a company Apple denounces as a "copyist". However, the public interest-related arguments that Verizon presents address the potential impact of a preliminary injunction, which is independent from the question of which particular categories of intellectual property may serve as its legal basis. As I'll explain further below, it's pretty transparent that Verizon is also against an injunction based on design-related rights.

U.S. courts grant injunctions -- and especially preliminary (fast-track) injunctions -- not simply because an infringement of valid intellectual property rights is proven. They perform a hardship analysis and consider the public interest. That is different from, for example, the German legal system, where a regional court already granted Apple two preliminary injunctions against Samsung (one for the Galaxy Tab 10.1 and another one for the Galaxy Tab 7.7). I will address and comment on Verizon's public interest argument further below.

Verizon Wireless -- 55% of whose shares are held by Verizon Communications, with the remaining 45% belonging to Vodafone, a major international operator headquartered in Europe -- played a key role in accelerating Android's adoption in the U.S. market, while its closest competitor, AT&T, used to be Apple's exclusive iPhone partner for some time. Earlier this year, Verizon also started selling the iPhone. That commercial partnership between the companies may continue if both parties consider it mutually beneficial, but it certainly won't benefit from Verizon's hostile move against Apple in connection with the Samsung dispute.

There's a constant power struggle between carriers and device makers. Carriers neither own nor need much intellectual property to operate their services profitably. Some of them also apply for limited numbers of patents, but they are pretty well protected by owning the infrastructure and the related operating licenses, and by network effects. From a carrier's point of view it may appear to be desirable to bring down the official price of smartphone and tablet computer operating systems to zero -- especially for the one company that's the closest ally among carriers of the company driving this commoditization, Google.

But it's another question whether Verizon makes the right choice for the long haul. Its management might regret its pact with Google later on:

From a short-term perspective, it would certainly be great if every device maker could steal every original innovator's intellectual property. Carriers and consumers would benefit temporarily from more choice and lower prices. But it's important to distinguish between competition and "copytition" (a term that recently came up in a discussion on AppleInsider.com). I've been highly critical of the German injunctions based on an excessively broad design-related right, and my position on software patents is no secret. However, there needs to be a rational approach, and Verizon appears to be pursuing a rather unsophisticated, ill-conceived anti-intellectual-property stance. Its recent call on the President of United States to veto ITC import bans was completely out of line in my view. It reflected a lack of respect for the law and for the independence of the judicial system.

I'd rather live in a world in which some wireless devices get banned from time time than in a dictatorship with a weak rule of law. I seriously wonder whether Verizon's top-level management is completely incompetent with respect to intellectual property issues and perhaps being a bit irrational, or whether it's just doing all of this in exchange for whatever Google may have promised them.

In the long run, even Verizon's management should have an interest in ensuring that innovators are sufficiently protected by the legal system. Otherwise everyone can copy whatever has been created before, but investments in continued innovation in this field might be reduced to a trickle. There's room for improvement. There's need for improvement. But Verizon's proposals are too radical to be helpful in any way.

Verizon's management either fails to understand this or its strategy is too shortsighted, but the problem is that Google's vision of commoditization would sooner or later also affect Verizon's own core business. What Google wants to do to Apple and other innovators is just the beginning. It wouldn't be the end.

In connection with Google's proposed acquisition of Motorola Mobility I wrote about Google's vision for this industry: everything in information and communication technologies (hardware, software, services) should have a price or at least a margin of zero -- and all the revenue should come from online advertising, which is Google's strength.

Google doesn't simply give away Android. There's a strategy, and Google executes it quite heavy-handedly. Verizon has so far had some privileges compared to other companies. For example, some Android-based devices that Verizon sells (or used to sell) were allowed to have Microsoft's Bing as their default search engine. But that's an exception (possibly due to special contractual arrangements) that proves the rule. Generally, Google does not allow officially-licensed Android handset makers (and their resellers, including carriers) to set a different default search engine than Google. Korean antitrust enforcers recently raided Google's offices in Seoul because of suspicions of anticompetitive conduct in this particular context, further to complaints lodged by two Korean competitors of Google.

In its brief, Verizon says that it "supports without reservation the protection of intellectual property rights", but apparently Verizon's support of intellectual property rights ends where their actual enforcement begins. Verizon loves intellectual property -- as long as it's just a toothless paper tiger.

Verizon's amicus brief is all about what Verizon portrays as the public interest. It explicitly "takes no position on whether Apple is likely to succeed on the merits of its infringement claims". It focuses completely on raising concerns that "an injunction may cripple the free flow of goods to Verizon Wireless, businesses and consumers".

While Samsung would benefit from a denial of a preliminary injunction, Verizon Wireless claims that it seeks to "minimiz[e] the adverse impacts to persons who are not parties to this dispute", which the introductory part of the brief summarizes as follows:

"The requested injunction of certain Samsung products will harm Verizon Wireless and U.S. consumers. It also has the possibility of slowing the deployment of next-generation networks -- such as Verizon Wireless's -- contrary to the stated goals of the U.S. government."

LTE (long-term evolution) is the fourth-generation wireless communications standard (the third generation was/is UMTS). Verizon states concerns that without Samsung's new LTE-compatible devices being available during this Christmas selling season, its expensive LTE infrastructure might not be used as much by consumers as otherwise:

"An injunction would prohibit some of the newest, most advanced wireless devices sold today and impede the growth of Verizon Wireless’s high-speed 4G network. The accused Samsung devices are among the few products that can access Verizon Wireless's next-generation high speed network and therefore are among the most sought-after devices by early-adopting consumers – a critical market segment in the industry. Verizon Wireless has invested and is investing billions in developing and deploying its next-generation Long Term Evolution ('LTE') 4G network; that investment depends on consumers having access to devices that can make use of that network. Samsung is one of only six manufacturers (including HP, HTC, LG, Motorola, and Pantech) that has developed and is offering a limited number of such devices today. Moreover, the motion to enjoin Samsung’s devices comes at a critical moment: when Verizon Wireless is expanding its LTE network to paying customers and right before the holiday shopping season."

It won't be easy for Verizon to convince the court that consumers wouldn't have plenty of other choices. Also, the injunction Apple requests wouldn't force Samsung out of the U.S. market forever. Samsung could modify its products accordingly and sell them. Since Verizon's brief is officially focused just on one software patent, an injunction based exclusively on that patent would not have to prevent Samsung from selling devices in the United States in the coming months. That patent covers one way -- not all ways -- to scroll lists, maps and similar objects. Granted, it's the best list-scrolling solution for touchscreen devices, but Samsung could still sell LTE-compatible, reasonably marketable devices without that functionality.

I said before that Verizon's brief limits itself to that one software patent only in formal terms. In connection with its official scope (that one patent), the LTE-related argument of the brief (which is what the whole brief is mostly about) doesn't make sense. In fact, "stock Android" (the version that one can download from source.android.com) comes with scrolling code that does not infringe the patent in question. Samsung could use that code and ship. Since the preliminary injunction motion was filed almost four momths ago, Samsung probably already has everything prepared for the event that an injunction is ordered only with respect to that scrolling patent.

Therefore, the whole brief only makes sense if, contrary to its official scope but according to common sense, it effectively also relates to Apple's design-related rights. If Apple prevailed on those, Samsung would have to physically redesign its products as opposed to making a little software change. So that's what Verizon really wants to prevent from happening -- but it isn't honest about it.

Another unconvincing point made by Verizon is this: Verizon complains that Apple's motion for a preliminary injunction targets "only Samsung devices that make use of wireless carriers' next-generation networks" (I listed the four products in the first paragraph of this post), while "[t]here are nearly two dozen other devices accused in the current lawsuit [meaning the regular proceeding, not the fast-track part related to a preliminary injunction]". Verizon says the products over which Apple is suing Samsung in the main proceeding -- but not on the special preliminary injunction track -- are "mainly older devices that are not designed to make use of Verizon Wireless's and other carriers' next-generation networks". Therefore, Verizon argues, "the proposed injunction would disproportionally affect the very devices that are most critical to adoption and expansion of Verizon Wireless's next-generation network".

What Verizon doesn't recognize here is that preliminary injunctions granted at the end of a fast-track proceeding -- unlike permanent ones decided on a regular schedule -- always require a sense of urgency. That sense of urgency varies between jurisdictions, but the underlying idea is the same around the globe: if you want to rush the courts to a decision, you have to demonstrate that you also act very quickly. You can't wait for a year to sue and then ask the court to decide within days, weeks or months. If Apple had asked the court for a preliminary injunction against all of the accused products, including the two dozen older devices Verizon refers to, most of the motion would have been dismissed right away just on the grounds of undue delay in bringing the motion.

After presenting its logic, which I, frankly, consider a total non sequitur, Verizon goes into further detail. Among other things, Verizon touts its investment in LTE network infrastructure:

"Verizon Wireless has invested enormous effort and resources into building and marketing its 4G LTE network, which already covers more than 100 markets and which will cover more than two thirds of the U.S. population by mid-year 2012. Since it was formed, Verizon Wireless has invested more than $65 billion – $6 billion on average every year – in its networks and services. In 2008, Verizon Wireless paid $9.36 billion for a group of wireless spectrum licenses for use in launching its LTE network.6 Verizon Wireless deployed its LTE network on December 5, 2010, in 39 major metropolitan areas covering more than 110 million people. Verizon Wireless's LTE network is on track to cover over 175 markets and more than 185 million people by the end of 2011."

Then Verizon explains the need for such a new network to be adopted by consumers, who in turn need devices that implement the new standard. According to its brief, Verizon had "500,000 LTE subscribers" by the end of the first quarter of 2011 and sold 1.2 million LTE devices "[d]uring the second quarter of 2011 alone".

Verizon underscores the importance of two of the four Samsung products targeted by Apple's preliminary injunction motion in connection with Verizon's LTE offerings:

"Verizon Wireless currently offers five models12 of LTE smartphones. The Samsung DROID Charge, one of the smartphones at issue in the motion, is one of the marquee products offered by Verizon Wireless to showcase its LTE network. Samsung's Galaxy Tab 10.1, which is also the subject of the motion, is the first LTE tablet sold by Verizon Wireless."

Verizon argues that consumers may "choose non-4G devices – and thus decrease the rate at which customers adopt LTE services" as a result of a preliminary injunction.

One paragraph of Verizon's brief stresses the importance of finding early adopters for new types of services to make them take off, and argues that "[i]f the early adopters are prevented from buying a Samsung device, they will be less likely to influence other, later users from subscribing to Verizon Wireless's LTE network".

That point is followed by a seasonal argument: "The harm from the proposed preliminary injunction would be increased if it issued during the holiday and year-end sales season." Verizon says "the time and money spent on [its holiday sales campaigns] would be lost" due to an injunction at this time of the year.

Finally, Verizon discusses the broader public interest in LTE adoption. The brief mentions that the U.S. government considers "expansion of wireless broadband technology a key policy goal" and quotes the President:

"High-speed wireless service is the next train station, the next off-ramp. It's how we'll spark new innovation, new investments, and new jobs."

But the same President has repeatedly described patent protection as being crucial for innovation, investments, and jobs -- most recently on the occasion of the signing of the first overhaul of U.S. patent law in more than 50 years. Verizon has to accept the fact that there's no such thing as patent protection without patent enforcement.

Verizon makes different arguments related to job creation. Besides a general claim that "[e]ach dollar invested in wireless deployment is estimated [by economist Lawrence Summers] to result in as much as $7 to $10 higher [Gross Domestic Product]", also refers to an article by AllThingsD on a "Smartphone Job Market Survey" according to which, Verizon claims, "jobs for Android developers rose 20% in the second quarter of 2011". Verizon does not mention that Apple's platforms are actually much more lucrative, in total but especially on a per-device basis, for app developers than Android.

In the last part of the section on the broader public interest argument, Verizon stresses "the importance of wireless broadband networks in helping first responders and other public safety officials" and the fact that "[s]peed and information are critical assets in an emergency and wireless broadband technology offers both". Verizon argues that subscriptions from consumers are needed to finance the infrastructure of such networks. Otherwise, Verizon says, there would be "less revenue to continue expansion of Verizon Wireless's LTE network, which is used by first responders". While there may be emergency-related technologies in which the speed of data transmissions can play a role, I can't see how anyone's voice call to a first responder would be noticeably faster on an LTE than any other wireless network.

I'm sure Apple will oppose Verizon's brief and will find many flaws in its logic. But the substance of the brief may not be the most important thing here anyway. This is clearly more of a political initiative. Verizon probably hopes that the court -- but also all those watching this process, including in Washington DC -- will take note of the fact that the leading U.S. mobile network operator sides with Samsung and raises concerns about the economy and the job market, concerns that don't look well-founded to me but certainly get attention in the current climate in the United States.

For Samsung this is definitely good news regardless of the weak and flawed substance of Verizon's filing and the transparency of its Google-aligned agenda.

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About Me

Florian Mueller used to be an award-winning intellectual property activist. His 30 years of software industry expertise span different market segments (games, education, productivity and infrastructure software), diverse business models, and technical and commercial areas of responsibility. In recent years, Florian advised a diversity of clients on the patent wars surrounding mobile devices, and on their economic and technical implications. (In order to avoid conflicts of interest, Florian does not hold or initiate transactions in any technology stocks or derivatives thereof, except that he is long AAPL.) He is now developing games for smartphones and tablet computers.